Despite Knowing What the Tax Law Required, Sprint Decided Not to Comply

Largest-Ever Recovery in a Single-State False Claims Act Lawsuit

NEW YORK – Attorney General Barbara D. Underwood and Acting Tax Commissioner Nonie Manion today announced a record-breaking $330 million settlement of a False Claims Act lawsuit filed by the Attorney General against Sprint, the cell phone carrier, and some of its subsidiaries. The lawsuit – People v. Sprint Communications, Inc. et al., Index No. 103917/2011 (New York County Supreme Court) – alleged that for nearly a decade Sprint knowingly failed to collect and remit more than $100 million in state and local sales taxes owed on its flat-rate wireless calling plans sold to New Yorkers. The $330 million recovery is not only the largest-ever recovery by the New York Attorney General resulting from an action filed under the New York False Claims Act, but it is the largest-ever recovery by a single state in an action brought under a state false claims act.

“Sprint knew exactly how New York sales tax law applied to its plans – yet for years the company flagrantly broke the law, cheating the state and its localities out of tax dollars that should have been invested in our communities,” said Attorney General Underwood. “Now, Sprint will pay the price with this record-setting settlement. This should serve as a clear reminder that the New York False Claims Act protects New Yorkers from companies that attempt to flout their obligations under New York tax law.”

The $330 million settlement announced today resolves this tax enforcement action under the New York False Claims Act brought by the Attorney General. At least twenty-nine states, the District of Columbia, and the federal government have passed False Claims Acts, laws which allow whistleblowers and the government to recover treble damages from companies or individuals that defraud the government. However, only the New York False Claims Act broadly covers all types of tax fraud.

Sprint’s decision not to comply with New York sales tax law for nearly a decade harmed not just the State of New York, but also every county, city, town, village, and school district in New York that imposes a sales tax. Indeed, for many counties, sales tax revenue is the largest portion of county revenue. A substantial portion of today’s $330 million settlement has already been distributed to the localities who were directly harmed by Sprint’s conduct.

“By blatantly understating the amount of sales tax owed to the tune of $100 million, Sprint violated the trust of its customers and deprived communities across New York State of revenue needed for vital services,” said Acting Commissioner of Taxation and Finance Nonie Manion. “We applaud the whistleblower who brought this injustice to light, and our colleagues at the Attorney General’s Office who worked closely with us on the investigation that led to this record-setting settlement of $330 million.”

The investigation leading to this settlement began with a whistleblower lawsuit filed under the New York False Claims Act. The Attorney General appreciates the whistleblower’s provision of information and assistance in this investigation. The whistleblower will receive $62.7 million, as the New York False Claims Act entitles whistleblowers who report fraud against the government to a specific share of the recovery.

After the whistleblower filed its lawsuit in March 2011, the Attorney General’s office, working closely with the New York State Department of Taxation & Finance, conducted an extensive investigation into Sprint’s conduct and in April 2012 filed a civil enforcement action against Sprint and certain of its subsidiaries. Since then, the New York Supreme Court, the New York Supreme Court Appellate Division, First Department, and the New York Court of Appeals have all issued opinions rejecting Sprint’s attempts to dismiss this lawsuit.

Since August 2002, the tax provision at issue in this lawsuit, New York Tax Law § 1105(b)(2), has imposed a sales tax on all wireless voice services that are sold for a fixed periodic charge, without differentiating between intrastate or interstate and international voice calls. The New York Court of Appeals has explicitly held that this provision is unambiguous.

Sprint and its subsidiaries sold wireless calling plans to New York customers. Some of those wireless calling plans permitted a customer to use up to a specified number of minutes of voice-only calling for a flat-rate monthly charge (for example, 500 minutes of calling for $50), and those plans did not distinguish between intrastate and interstate calls.

The Attorney General’s investigation found that in early 2002, Sprint and the other major cell phone carriers lobbied the Tax Department in connection with the enactment of Tax Law § 1105(b)(2), which ultimately took effect in August 2002. The Attorney General’s investigation found that Sprint’s Regional Director for State and Local Government Affairs played a lead role in those lobbying efforts on the industry’s behalf. The Attorney General’s investigation also found that as part of those lobbying efforts, in spring 2002 that same in-house Sprint lobbyist agreed in writing that the soon-to-be-enacted Tax Law § 1105(b)(2) would maintain existing sales tax revenue payments for “bucket” plans (i.e., wireless calling plans which provided a fixed amount of voice calls for a fixed price) by imposing sales tax on those plans without regard to whether the calls were interstate or intrastate. That is exactly what Tax Law § 1105(b)(2) unambiguously did.

In addition, the Tax Department issued a guidance in 2002 that correctly explained the newly enacted Tax Law § 1105(b)(2) and provided the following example: “Example #1: Mr. Smith buys a cellular calling plan from a home service provider which includes up to 2,500 minutes of use for a flat-rate charge of $49.95 per month. The contract provides that additional charges will apply for calling minutes that exceed the minutes allowed under the plan. In November 2002, Mr. Smith does not exceed the calling minutes allowed under the plan, and is charged $49.95 for the month. Such charge is subject to sales tax under section 1105(b)(2) of the Tax Law, regardless of whether the calls made under the plan were intrastate, interstate, or international calls.”

The Attorney General’s investigation found that Sprint’s in-house tax lawyers knew of the lobbying efforts by Sprint’s in-house and external lobbyists regarding Tax Law § 1105(b)(2), that they reviewed both the unambiguous language of Tax Law § 1105(b)(2) and the clear Tax Department guidance in 2002, and that they were aware that the entire portion of a flat-rate charge attributable to wireless voice calls is subject to sales tax under Tax Law § 1105(b)(2), regardless of whether the wireless calls made under the plan were intrastate, interstate, or international calls.

However, even though Sprint’s in-house tax lawyers and lobbyists knew what Tax Law § 1105(b)(2) required, the Attorney General’s investigation found that in 2005, Sprint decided to violate New York law by failing to collect and remit state and local sales tax on the portion of a flat-rate charge for a wireless calling plan that Sprint arbitrarily deemed to be for interstate calls. Sprint continued to violate the law even after the Attorney General’s investigation began and even after the Attorney General filed this lawsuit. It was not until May 2014 that Sprint finally agreed to comply with the law.

Attorney General Underwood expresses her deep gratitude to the auditors, attorneys, and other staff at the New York State Department of Taxation and Finance for their critical contributions to this case.

The Attorney General’s lawsuit was led by Senior Counsel Bryan Kessler, with the assistance of Assistant Attorney General David Farber and Legal Support Analysts Justin Meshulam and Bianca LaVeglia, together with the other attorneys and staff of the Taxpayer Protection Bureau. The Taxpayer Protection Bureau is led by Bureau Chief Thomas Teige Carroll and Deputy Bureau Chief Scott Spiegelman, and it is part of the Division of Economic Justice, which is led by Executive Deputy Attorney General Manisha M. Sheth.

Numerous other current and former attorneys and staff of the Attorney General’s Office made valuable contributions to the successful investigation and prosecution of this lawsuit, including Deputy Solicitor General Steven Wu and Information Technology Specialist John Roach.

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